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Can You Use A Personal Loan To Fund A Business?

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If you plan on starting a business, you’ll likely need more capital than you happen to have on hand. The SBA estimates that the average business requires approximately $30,000 in startup costs, with variations based on the nature of your business and your choice in asset acquisition. There are many ways to raise this money, including collecting capital from friends and family members, working with angel investors, seeking venture capital, or even crowdfunding. However, there are also potential downsides to all of these options—including forfeiting part of your ownership in the company in some cases.

In any case, whether you seek these primary options or not, eventually you may need to take out a loan for your business. Small business loans and lines of credit exist to help entrepreneurs build their dream companies and achieve their goals, but you may not realize that it’s possible to take out a personal loan to fund your business as well.

Advantages of Personal Loans

Rather than taking the loan out via your business entity, you’ll take the loan out personally, and you’ll enjoy the following benefits:

- Diversity of options. First, you’ll have a diversity of options when it comes to finding the right personal loan to fund your business. Different lenders offer different terms, different limits, and different APRs—with different requirements for getting the loan in the first place. For example, if you’re trying to minimize your interest payments, you could opt for a low-interest short-term loan. Even then, you’ll have your choice of dozens of different providers, so you can create the loan payment plan that best fits your lifestyle, income, and goals.

- No need for business history. When banks consider whether to give a business a loan, one of the most important factors they consider is the history of the business. If you’ve been in operation for several years, retaining a steady revenue stream, you won’t have a problem getting a loan. New businesses, on the other hand, don’t have much history to work with, and often have trouble proving their hypothetical revenue models. Personal loans bypass the need for that business history.

- Ties to personal credit. Instead of relying on your business’s history, personal loans rely on your credit score (and a host of other factors). If your credit is in good standing (usually considered to be 700 or above), you should have no trouble getting favorable terms. If your credit score is in bad shape, you might consider working on your personal finances before trying to start a business.

Disadvantages of Personal Loans and Alternatives

Of course, there are some disadvantages too:

- Stricter limits. Generally, a personal loan has limits to how much you can borrow. Some entry-level loans top out at a borrowing threshold of $10,000, while some extend up to $100,000. It also depends on your credit history, and whether you’re able to offer collateral for a secured loan. Business loans tend to have much higher limits, which may be important depending on the business you’re trying to build.

- Personal liability. Remember, your personal loan will hold you personally liable for the capital you take out. In the event that you’re unable to pay the money back, the lender can go after your personal assets, including your home or vehicle.

If you find that a personal loan isn’t the right option, there are plenty of other alternatives to choose from, the most obvious being a traditional business loan. Just like personal loans, business loans come in many forms, including long-term loans, equipment financing, short-term cash advances, invoice-based loans, and even business credit cards. Floating lines of capital, which can be drawn on and paid off repeatedly, also exist if you plan on experiencing low cash levels in your first few years of operation.

Some businesses can be started for just a few thousand dollars (or even less), but the vast majority will require you to think seriously about your financial options. Personal loans are a legitimate choice, and in many cases, an advantageous one, so make sure you consider them carefully before making the final call.